Andre Dauwalder, Solicitor
AGL Sales (Qld) Pty Ltd -v- Dawson Sales Pty Ltd & Ors
In the 2009 Queensland case of AGL Sales (Qld) Pty Ltd v Dawson Sales Pty Ltd, the Supreme Court considered whether, under a February 2003 gas supply agreement (GSA) a failure to supply agreed quantities of gas due to difficult geological conditions could be considered a "force majeure event".
AGL Sales (Qld) Pty Ltd purchased coal seam gas to Dawson Sales Pty Ltd, extracted from the Moura coal mine. Dawson indicated it was having trouble extracting gas due to difficult geological conditions, and subsequently sought to rely on the force majeure provisions of the GSA.
Under clause 10.1 AGL was permitted to nominate any quantity of gas for delivery on any day, provided it did not exceed the Maximum Daily Quantity (MDQ), as specified in the GSA. AGL was obligated to pay for at least 80% of the aggregate of the MDQ in each month. This meant that Dawson was required to supply, over time, at least 80% of the MDQ and, if required, the whole MDQ.
Under clause 5.1.2, Dawson was not required to supply gas from any area other than the defined 'Gas Field', and could not be obliged to make up any shortfall by purchasing gas from other fields for delivery to AGL.
Under clause 7.2, if Dawson failed to deliver the required quantity of gas, it was obligated to pay a 'Remedy Amount' of 40% of the contract price per gigajoule times the quantity of the shortfall.
The force majeure provision
Clause 14 provided that if a force majeure event occurred, Dawson must without delay issue a notice setting out details of the event, an estimate of the reduction in supply, and an estimate of the duration of Dawson's inability to perform (Curtailment Notice). A force majeure event was limited to an "event or circumstance, or combination of events or circumstances" that was "not within the control of a Party".
Importantly, clause 14(h) expressly included "unpredicted, sudden and material deterioration in productivity of more than one well or failure of wells", and excluded "full or partial interruption of the delivery of gas...due to failure or unpredicted and sudden deterioration in productivity of a single well."
The Curtailment Notice
On 9 July 2007, Dawson issued the Curtailment Notice on grounds that it was unable to supply the required quantities of gas due to drilling problems created by unexpectedly complex geology. The notice was provided after some 12 months of undersupply.
The notice alerted AGL to the drilling difficulties encountered by Dawson in a recently acquired area known as Ridgedale, by stating:
"In developing 15 new wells at Ridgedale, Moura Sales has encountered unpredicted and substantial geological problems.
The geological problems are most prominently severe structuring and faulting of lateral drill holes at various levels.
Structuring and faulting problems has caused both drilling difficulties and closing of lateral drill holes at Ridgedale."
As a result, several wells suffered a deterioration of productivity whilst others had failed to produce at all.
The alleged force majeure event
As a result of the combined failure of the wells, Dawson informed AGL that it intended to reduce the quantities of gas to be supplied under the GSA (via an amendment to the MDQ), pursuant to the force majeure provisions.
Dawson argued that it was not necessary that it demonstrate a distinct event or occurrence that would amount to a force majeure event. Instead, force majeure may be constituted by a sequence of distinct occurrences. Therefore, the effect of one well failure should be aggregated with the effect of other failures that may have occurred several months earlier. The collective effect of the well failures should be considered as a combination of events, or circumstances amounting to a force majeure event.
Findings of the Court
The Court held that the circumstances described in Dawson's Curtailment Notice did not constitute a force majeure event. The Court held that:
"A force majeure event is something which "occurs". It may be an event or circumstance, or a combination of them, but there must be an occurrence, and necessarily, one within the life of the Agreement."
The Court considered that the alleged force majeure event was constituted by a combination of events and occurrences at different times over a period greater than 12 months. None of these occurrences, if considered separately, could be considered a force majeure event (due to the express exclusion). Further, the geology itself could not be considered a force majeure event as complex geology is not an event or circumstance that "occurs" within the life of the GSA.
The Court then considered the express exclusions and inclusions under clause 14. After reviewing the productivity of each well, the Court concluded that each failure or deterioration in productivity was a separate event, none of which amounted to a force majeure event. The Court pointed out that the express inclusion under clause 14(h) referred to a "failure of wells", rather than the "failures of wells". Each failure was an event, but where there are two failures "it must be the combined effect of those events which causes an interruption of delivery of gas". The Court considered the situation where one well fails causing partial interruption in its delivery of gas, and several months later another well fails, causing its own partial interruption of delivery. Those failures would not be considered distinct force majeure events. As to their aggregate effect, the Court remarked:
"But there is not an interruption which has been caused by them in combination. There have been two distinct interruptions, some months apart, and the second interruption would not in any sense have been caused by the first well failure. In other words, to fall within the specific inclusion within para (h), what must occur for several wells, by a failure or an unpredicted, sudden and material deterioration in productivity, are events which operate in combination to cause a certain interruption of the delivery of gas."
The Court also referred to the generality of Dawson's Curtailment Notice, which failed to identify a certain occurrence (in the sense of an event or circumstance), or events or circumstances acting in combination, that would have an immediate consequence upon Dawson's performance at that point in time. Further, the Curtailment Notice involved a comparison of Dawson's forecast productivity with its actual productivity. The terms "interruption of delivery" under clause 14(h), however, contemplates a comparison of actual productivity at two points in time.
In summary, the Court held that the failure and deterioration of Dawson's wells were not to be considered a "combination of events or circumstances" amounting to a force majeure event. Further, the express inclusion under clause 14(h) did not apply as the inclusion referred to a "failure of wells", whilst the current facts point instead towards "failures of wells".
Dawson have appealed the decision and filed a Notice of Appeal on 9 March 2009.
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